Results and Implications of the Manufacturing Institute for Supply Management’s Report on Business for Q1 2020

On April 1, the Manufacturing Institute for Supply Management (ISM) released its latest Report on Business, a monthly publication that provides industry trends and statistics for the manufacturing sector. The referenced Purchasing Managers Index (PMI) below is a composite index for the manufacturing industry compiled by the ISM, and is based on five subcategories: new orders, production, employment, supplier deliveries, and inventories. A PMI index over 50% indicates that the manufacturing environment is expanding, and the ISM uses this information to analyze the state of the economy and predict future growth or contraction. See below for the PMI for each month in Q1 2020 and Q1 2019:

Although the economy technically grew for the 131th straight month, the continued growth of the manufacturing sector has come to an end as the effects of the COVID-19 pandemic are felt by the sector. With the exception of supplier deliveries, all indexes that feed into the calculation of PMI came in below 50% on March 31, 2020.

Inputs are calculated using supplier deliveries (65% on March 31), inventories (46.9% on March 31), and imports (42.1% on March 31). Supplier deliveries is a unique index, since it shows an inverse relationship. It assumes that deliveries will be slower in times of economic growth due to increased demand. Therefore, the 65% for supplier deliveries would typically indicate a growing economy. Instead, many of the panelists noted supply chain constraints from China that result in slower deliveries. Inventories have been contracting for ten straight months; however, it is anticipated that this will be coming to an end. Timothy R. Fiore, Chair of the Institute for Supply Management, noted that, “… Inventories are expected to grow as disruptions in the supply chain lead to inefficiencies in material conversion and continued advance stocking to protect production schedules.”

Consumption is calculated using production (47.7% on March 31) and employment (45.75% on March 31). Production was affected by insufficient backlog, supplier delivery restrictions, and a lack of new orders. Among panel members, 71% noted that they planned to reduce headcount or put in place a hiring freeze. According to the Bureau of Labor statistics, the unemployment rate came in at 4.4% at March 31, 2020, which is the highest it has been since August 2017. To further put this into perspective, the number of unemployed individuals in America increased from 1.4 million to 7.1 million in March. As many face the loss of their jobs and uncertainty of the future, consumption will likely continue to decrease.

Prices contracted and came in at only 37.4% on March 31. This is the lowest prices have been since January 2016. This is primarily due to decreasing prices of various raw materials and energy sources. Also, with a continued increase in inventories and a decrease in consumption, prices will likely continue to decrease.

All sectors were impacted by the COVID-19 pandemic. Transportation and Petroleum & Coal Products were hit the hardest. The price of oil dropped drastically since the beginning of 2020. On January 1, 2020, the price of WTI Crude oil by the barrel was $61.06, and at March 31 2020, it was only $20.48. This was the lowest oil prices had been since 1999.

Food, Beverage & Tobacco Products’ industry representatives reported record orders. However, this influx in demand was due primarily due to consumers stockpiling goods in preparation for social distancing and quarantine and will not necessarily hold true after consumers have sufficiently stocked their pantries.

There was a great deal of uncertainty at the end of 2019 as to where the manufacturing industry was headed. Unfortunately, we have a much better sense now that 2020 poses great challenges to all in the industry.

For further information on the ISM Report on Business, go to https://www.instituteforsupplymanagement.org/ISMReport/MfgROB.cfm?SSO=1